Carbon fiber (CF) containing 1.4 and 2.1 mmol/g of -COOH and -OH groups, respectively, was functionalized by using an excess of tolylene-2,4-diisocyanate. The NCO-modified CF was submitted to a graft reaction with hydroxyl-terminated polybutadiene (HTPB). The HTPB-grafted carbon fiber was employed as reinforcing agent for epoxy resin-based composites. The presence of the flexible HTPB at the interface between the fiber and the matrix resulted in a substantial improvement on impact strength. Additional improvement on toughness was achieved by using epoxy matrix containing dispersed phase of HTPB. The composite morphology was also studied by scanning electron microscopy. (C) 1999 John Wiley & Sons, Inc. J Appl Polym Sci 74: 1424-1431, 1999.